The offer of free financial advice has been a bugbear of ours since the 1990s. The recent announcement by British Gas, and other utility companies, stating that the increase in customer bills will be down to the introduction of “free” controllers in houses, is a reminder of what free actually means.
Does anyone out there really believe in the concept of free? (You can give that to the birds and bees)
Buying a product, whether a car or investment, sold with “free” or 0% interest loans leaves the purchaser to recognise that the cost actually comes later. And what a cost that can be!
In the good old days in the UK back before proper regulation or qualifications, non-salaried and commission-based advisers were judged by the levels of commission they earned, rather than the quality of the advice given. Many firms applied levels of sales as the Key Performance Indicator, to the detriment of all else. Yet, if investors were “advised” or bought anything then it was provided as free financial advice.
It still amazes us that this remains the way many expat advisers provide advice to expat investors all over the world. Let us look at how things changed for the better in the UK, and where much of the world currently still has to go.
Free Financial Advice and RDR (UK)
In 1995, commission had to be disclosed and so the public could at least see the amount the adviser was being paid. But, the initial advice and recommendations were still free but contingent on a sale. In other words, if the potential client did not accept the free financial advice, the adviser got nothing.
You can see how claims of potential bias and conflict of interest arose, even if the adviser was truly altruistic.
From 31st December 2012, independent advisers could not take commissions from investment products and there was a fear that this could end the careers of many advisers and firms in the UK.
The key point to note, from 2013 onwards, was that advisers now had to provide clear and transparent fees for their potential clients to agree to, BEFORE making recommendations. The free financial advice days ceased but where they ever free, and what has actually happened?
With an increased qualification requirement and more and more firms becoming Chartered, a value is being placed on financial advice. Investors are now shown the consequences of both taking professional advice and not taking it, and this is shown in investment results and reduced tax demands.
Meanwhile, many overseas expat advisers laugh at the UK advisers and “their pitiful earnings” and continue to offer free financial advice not realising that they are nothing more than product salesperson (QROPS with a bond anyone?) who are telling the world that he/she has put no value on their own advice or service offered.
In the UK, clients have the right to not pay for a service if not provided. They can stop ongoing payments to the adviser for failing to provide a service without notice. Also, there are no contractual obligations to pay over a time period when the service is first offered, non-UK investors can get tied into a product and service for 10 years (No way out) . The power is with the client.
What do you think has happened in the UK? Either:
- Mass cancelling of payments to advisers leading to firms ceasing operation, or
- Firms improving service propositions putting clients objectives at the heart ?
A follow on from (2) is that firms are now considerably more efficient and no longer cross- subsidise advice streams (i.e. stiffing a well-off client to cover the smaller value clients), thus leading to many firms identifying particular areas that they wish to focus on – specialise in other words.
Reap what you sow
Used in the positive context, to reap the benefits for work undertaken as preparation, there are cases where an adviser should not charge.
We see offers of “first meeting free”, to prospective clients. Again, to us, this sends out the wrong message. The meeting is not free as there is the cost of preparation, travelling, and the hour long meeting, follow- up calls, office costs and professional time.
We would prefer the phrase “First meeting at the cost of the adviser” or “Initial meeting provided at no cost to the client”. Thus dispensing with the word “free” and introducing cost to the process at outset. It also indicates that after this first discussion, there are going to be costs!
In the UK, we have witnessed this process first hand and, of course, some investors try to obtain free advice in a one hour meeting. They ask us “Which investment or pension provider are going to recommend?”.
Normally, non-UK advisers would be able to tell them as they had a product in mind before the prospective client had even been met, but that shows the value of their advice service – zero! If that is the “advice” then investors should buy the product without the salesman and save themselves the commission.
If an investor wants advice then it is the advice that has the value and not the commission.
Any professional, be it lawyer, accountant, architect etc. will usually not charge to introduce a service, getting to know if the client is right for them (yes, it is a two way street), identifying if the firm can help and then providing an indication of cost.
Likewise a true independent adviser should provide their charges by way of a services agreement during this meeting and explain the service and fees to the client clearly.
Non-UK Free Financial Advice
Unfortunately, in most countries outside of the UK, there is no requirement to disclose commissions and so the offers of “Free Financial Advice” persist. Again, as in the UK pre-RDR, no sale = no commission and so the accusations of conflict of interest and bias will always be made.
What the investors are not told is that the commission is taken from their investments, as soon as they invest, and handed over to the adviser. This commission is then “factored” and charged to the client over years penalizing the clients’ growth. Worse still, if the investors want their money back early, they face a surrender penalty of up to 10% (or even 13.98%, as we have just witnessed).
The investors just do not see this and suffer a plight similar to that of Prometheus, the eagle constantly picking at the investment growth as soon as it appears, repeated endlessly with no way out .
If you are requesting advice about your investments and pensions, you must ask how the adviser is paid and exactly by whom. Then, ask how much the adviser will be paid and if it is contingent on the purchase of a product. If you then know the product, go and invest direct and do away with the commission. If you want financial advice then pay for it. The value of it will be paid back many times over and there will be no lock in penalties.
Financial planning is not all about selling a product, it may include reviews of investments, tax planning, cash flow forecasting, budgeting and end up with no purchase of any product at all.
If a product is to be recommended, then the amount paid to the adviser should be the same whatever product is recommended. This is the only way to remove bias and, since there is no bias in this case, it is in the adviser’s best interest to recommend the most appropriate product or the client will move elsewhere.
Joint authors- James Caldwell and Christopher Lean
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published on 7th August 2017
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